Dolat Capital recommended accumulate rating on Berger Paints with a target price of Rs 263 in its research report dated November 06, 2017.
Dolat Capital's research report on Berger Paints
Revenues (consol.) grew by 11.8% YoY to ` 12.8bn in-line with our estimate. Standalone revenues were up 11.3% at ` 11.4bn (implied volume growth of ~9%) and subsidiary business witnessed 15.8% YoY surge in revenues. The primary analysis suggests that the volume growth was lower compared to APL (~9-10%) and Nerolac (~18%). Gross margins (consol.) contracted by 100bps YoY at 42.9%, due to rise in key RM prices. EBITDA grew by 11.4% YoY at ` 2.0bn, while EBITDA margins remained flat YoY to 15.5%. Despite contraction in GM and 80bps increase in employee spends, 170bps decrease in other expenses offset the decline in EBITDA margin. APAT jumped 17.7% YoY to ` 1.1bn. Including OCI and exceptional gain of ` 442mn related to slump sales in Q2FY17, the RPAT jumped 4.1% to ` 1.4bn.Berger is gaining 50-100bps market share annually in past 4-5 years. After continuously outpacing APL volume growth in past few quarters, for the first time Berger reported lower volume growth. We attribute this to supply hurdles during Jul’17 due to GST implementation. However, new and innovative launches would help the company to gain market share. We believe that the company has lower penetration compared to the leader which presents higher scope for further growth.
With better monsoon in the last couple of years, painting activities are expected to increase in coming years. We expect pent-up demand in the system as FY17 was partially impacted by demonetisation and ‘feel good’ factor remains with better economic conditions, especially in rural markets. Berger, the second largest player in the domestic decorative paint industry is likely to benefit more due to (1) rising distribution reach (2) strong presence in urban markets and (3) attractive product offering in all categories. Further, the company’s continuous efforts to improve operating efficiency will enhance operating margins. We expect Berger to report EBITDA margin improvement with stable demand and favorable business conditions Valuing Berger at 43x FY19E EPS to arrive at a TP of ` 263. Downgrade to Reduce. (Prev. - Accumulate).
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